Monday, February 3, 2014

The (Contradictory?) Why Of (Some) Economics

One of the basic elements of contemporary economic reasoning is attributing to people self-interest. Sure, we might quibble at the margins about whether limited range altruism is well-modeled by economic theory -- as in Becker's famous "economics of the family." But those debates don't really touch the basic and widely shared assumption that when it comes to generally understanding the way strangers relate and interact, the economic answer to the "why" question is self-interest: rational people do what they do because they think it will benefit them.

Often, it seems this answer seems intended to have both a descriptive and a normative dimension. Descriptively, it says that people are this way. Normatively, it says that, at least in some sense and in some contexts, people ought to be this way, that it is good and appropriate that they are. In an Adam Smithian mood, we might say that when people make self-interested exchanges, good things happen. People get what they want, on all sides, in a way compatible with self-respect and dignity.

In one strain of contemporary economic thinking, the sense in which "good things happen" in this normative dimension is understood in terms of "efficiency." This term has multiple meanings and a slippery history (as I discuss here), but often it's deployed to mean that something good -- money, or preference satisfaction, or whatever -- is being maximized overall. So self-interest is thought to be good *because* it promotes maximum overall benefits at the least cost.

But here's where the why of economics seems to me to get self-contradictory. Because on the one hand, the answer about why people do what they do is self-interest. But then on the other hand, the answer about why it's good and appropriate that people do that is in terms of the interest of everyone.

It seems to me that this isn't just academic weird. It's actually weird-weird. And the weirdness of it comes out when you notice that economic methods are used to address questions of how society should be set up -- of what laws and policies and so on we ought to have. Economic analysis tells us that the way we should make decisions about these things is to consider what system will produce the most overall efficiency: how can we structure incentives so that people acting-self-interestedly will bring about the best overall benefits at the least cost?

In this case, you really do have two incompatible things going on: self-interest as a guide to action, and efficiency as a guide to action.

So, for instance, what if you're making a decision about a policy that you personally will get screwed by? Then suddenly you're supposed to put aside your self-interest, not only to consider your fellows, but to consider them equally, and to be made as satisfied by their flourishing as if it was your own?

That's not just a different perspective. It's like the opposite perspective.

Consider this example, the details of which get discussed in this recent New York Times Economix blog post, in which we have to decide whether to have a draft or volunteer army. Before going on to challenge it, the author of the post describes the standard economic reasoning in favor of a volunteer army. That reasoning points out, roughly, that in a volunteer army, the principle of rational self-interest dictates that people without other good options are the ones most likely to sign up, while those who are talented and able enough to become doctors, lawyers, etc are most likely to stay home. And things are better overall if those people stay home, since they are most productive. The draft, because it drafts everyone, entails a "social cost" relative to the volunteer army, in making these productive people go to war.

But this is weird. If you're among the poor and less talented, the idea is you'll opt for the possible injury, trauma, and death associated with being a soldier because it's the best option you have. The reasons are self-interest. But with respect to why it's a good policy, the idea is you have to look at the impersonal benefits conferred on people in general -- people who may be far away strangers to you. The reasons are utterly impersonal, completely other-regarding. Those are two totally different things.

It might be objected here that the volunteers in the volunteer army don't "lose out" because the volunteer option gives them an option they didn't have before. But whatever we want to say about that complex issue, the general point remains: of course there are policies that bring costs to some people even as they benefit the whole. What are those people supposed to favor? Themselves or everyone?

It's almost like if you personally lose out relative to others by a policy that results in overall positive benefits, you're suddenly supposed to put aside your self-interest and think "hey, it's OK, we're all in this together?"

Not only would would violate both the normative and descriptive aspect mentioned at the start, it's also the sort of idea that if you said it in favor of any policy favoring, say, equality instead of self-interest or efficiency, you'd be sure to get some response along the lines of "poor kid, she just doesn't understand economics."

1 comment:

Interesting post. A question I have for you in terms of the economic analysis of policies: Do the economists (or the sort of economics you mention) who do this sort of thing mean to say that the economic analysis they offer is the end of the story (i.e. that what is deemed efficient at the end of the analysis is the right answer)? I ask because it seems to me that an economic analysis is one aspect of policy decisions (unless of course the economist is the boss or leader or something, with no checks), and often illuminates something interesting, just as moral philosophy (which I bring in because it's what you do) illuminates something.